What is a 95% LTV mortgage?
A 95% loan-to-value mortgage - or 95% LTV mortgage - means borrowing 95% of the value of the property you are buying. With this type of product, you will have to contribute 5% of the value of the property.
While there are some specialist mortgages available at 100% LTV, or even higher, these are hard to find and not generally available to most borrowers. In terms of mainstream mortgages, 95% is currently the highest loan-to-value product available, which means you will have to contribute 5% of the value of the property.
95% LTV mortgages had become rare over recent years, with lenders keen to reduce their risk exposure after the financial crisis. This was intensified by the effects of Covid-19, with the result that the number of 95% LTV mortgage products fell to just 3 in February 2021, compared with 273 in March 2020.
However, the government’s mortgage guarantee scheme has been designed to incentivise lenders to launch higher LTV products. The government's 95% mortgage guarantee scheme effectively offers partial compensation to lenders on part of the mortgage should a borrower default, which is resulting in a greater amount of choice of 95% LTV mortgages for consumers.
Which lenders are offering 95% LTV mortgages?
The government's mortgage guarantee scheme was launched with backing from some of the largest lenders in the UK, with Barclays, HSBC, Lloyds Bank, NatWest and Santander all committing to launching 95% LTV mortgages in April 2021, with Virgin Money set to follow suit in May 2021. As part of the scheme, they will all have to offer a 5-year fixed rate deal as part of their 95% LTV range, with the government stating this provides borrowers with greater security and predictability. The maximum loan size backed by the scheme is for properties up to the value of £600,000.
Outside of the mortgage guarantee scheme, other major lenders have been quick to announce their own plans to reenter the 95% LTV space. As such, TSB, Bank of Ireland, Aldermore, Danske Bank, Skipton, Coventry and Yorkshire Building Society (through subsidiary Accord Mortgages) have all announced launches. It's safe to assume there will be plenty of other lenders doing the same in the coming weeks and months, keen to make the most of increased demand from borrowers for low-deposit options.
How much do 95% LTV mortgages cost?
It is worth noting that you will generally pay more for a 95% LTV mortgage than for lower LTV alternatives. This will make your monthly repayments higher, so it might be worth considering waiting until you can secure a lower LTV deal, either by saving more towards a deposit or building up more equity in your existing property.
In the table below we show you the new deals that have been launched in March 2021 at 95% LTV. They are all based on a five-year fixed rate deal, although some of the lenders also offer other terms. The lenders participating in the government's mortgage guarantee scheme are due to launch their 95% LTV products in April/May 2021, while other lenders have also expressed they are looking to reenter this part of the market with their own products.
Lenders offering 95% LTV mortgages - March/April 2021
Not available on flats or new builds, maximum £500k loan size
|Skipton Building Society||4.17%||No fee||Only available to first-time buyers|
|Bank of Ireland||4.05%||No fee||Available to self-employed|
Available to self-employed and adverse credit
|Coventry Building Society||3.89% (with fee) or 4.09% (no fee)||£999||Maximum loan size £400,000|
|Danske Bank||4.40%||No fee||
Not open to people on furlough unless part of a joint application
Can I get a 95% LTV mortgage?
As 95% LTV mortgages are deemed to be riskier by lenders, your application is likely to be scrutinised before you are accepted. The lender will be keen to check the valuation on the property is accurate, as well as working out whether you are likely to be able to keep up with the monthly repayments. This will be assessed by looking at:
- Your credit history: The lender will want to look at your past financial behaviour and your current financial commitments to see how likely you are to service the debt responsibly. For a 95% LTV deal, you will generally need an excellent credit score with the credit reference agencies. This will be assessed by the lender running a credit check on your file, which will then be visible to other lenders. It is, therefore, a good idea to check whether you are likely to be accepted in advance to avoid a rejection further weakening any credit score. You can do this by checking the eligibility requirements set out by the lender, or by using a mortgage adviser who can determine the chances of you being accepted.
- Affordability: You will need to be able to demonstrate you will be able to afford to pay back the mortgage. The lender will take your income into account, as well as things like living costs and existing debts.
How can I get the best 95% LTV mortgage for my circumstances?
While you can simply assess the deals available with the main lenders and approach them directly, many of the best deals are only available through intermediaries. A good independent whole-of-market mortgage adviser will be able to look at your individual circumstances and help you find, not only the best value deals, but also those you are most likely to be accepted for. He or she will take into consideration:
- How much you need to borrow: Lenders have different criteria on how they work out the maximum loan size, based on income multiples. If you are looking to borrow a relatively large amount compared with how much you earn, an adviser will be able to find lenders with more generous income multiple allowances or, alternatively, can give you a clearer understanding of a more appropriate level of borrowing.
- What type of mortgage suits your needs: Although most of the new 95% LTV mortgages are five-year fixed rate deals, an adviser will be able to talk you through the various types of mortgages available, as well as the length of time you can pay back the loan over.
- Whether it is a joint application: If you are buying a property with someone else, it alters the income multiples lenders use.
- Any specific requirements: If you have been furloughed, are self-employed, have irregular income or have a bad credit history, an adviser will be able to work out the best mortgage option for you, as well as providing access to specialist lenders that are not available direct by the general public.
In terms of choosing which one to use, you may want to consider an online mortgage broker such as Habito*. We have independently vetted their services and you can read our full review - 'Habito review: The best online mortgage broker for you'.
What are the advantages of 95% LTV mortgages?
- The main advantage of a high LTV mortgage for first-time buyers is that, because you don’t need to have a large deposit, you are likely to be able to buy a property sooner
- If you are remortgaging, it is useful to have higher LTV products available in case the value of your property has dropped. Similarly, if you are looking to move to a more expensive property and have limited equity available in your current home, a higher LTV mortgage could be necessary
What are the disadvantages of 95% LTV mortgages?
- As 95% LTV mortgages are seen as being higher risk to lenders, they typically attract higher interest rates than lower LTV alternatives. This means you will end up paying a higher monthly repayment and a greater amount across the lifetime of the mortgage. However, you will typically be able to remortgage on to a lower LTV deal at a cheaper rate when the initial offer period is over, assuming your home has gone up in value and you have kept up repayments.
- Some - but not all - lenders charge a higher lending charge for higher LTV mortgages. Also known as a mortgage indemnity guarantee, this charge is used by the lender to buy an insurance policy to protect it against the extra risk of default. This charge could be anything up to 8% of the amount you borrow and may have to be paid upfront or, with some lenders, can be added to the mortgage balance.
- One of the main risks for those who choose 95% LTV mortgages is negative equity. This happens when the value of your property falls and you end up owing more on your mortgage than the property is worth. This is obviously much more likely to happen if its starting value is only 5% more than your mortgage total. It has implications if you want to move house or when you need remortgage as you may struggle to find a lender who is willing to lend to you.
Alternatives to 95% LTV mortgages
A simple alternative to a 95% LTV mortgage is an equivalent deal at a lower LTV ratio. By saving more towards a deposit, you could potentially save yourself thousands of pounds over the term of the mortgage by paying significantly lower interest rates. However, this isn't an option available to everyone and, in a challenging market, the appeal of 95% LTV products is easy to understand. Other options include:
Shared ownership schemes work by the buyers owning a share of the property - typically 25%-75% - and paying rent on the remainder. As you are not buying the whole property upfront, you may be able to borrow at a lower loan-to-value, opening up cheaper deals. The scheme is a good option for those who are keen to get on the property ladder but have perhaps been priced out of the market. Applicants must have a household income of less than £80,000 per year (£90,000) in London.
For more information, see our article "What is the shared ownership scheme?".
Help to Buy Equity Loan
Help to Buy equity loans require home buyers to only put down 5% deposit on a new-build property, with the government lending you a further amount to cover a portion of the property price. This amounts to 40% in London, 20% in the rest of England and Wales and 15% in Scotland. The equity loan is interest-free in the first five years. After that, you will be liable to pay interest; the current rate is 1.75%.
For full details, check out our article "What is the Help to Buy equity loan scheme?"
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